Persimmon plc (PSN) Ordinary 10p

Persimmon’s weekly net private sales rate per outlet was 0.66 in the first quarter, up from 0.62 last year. Total order book value moved 3.6% higher to £1.75bn.

Private average selling prices were up 6% to £283,000, with the use of buyer incentives currently running at around 4-5%.

CEO Dean Finch said the group is on track to deliver between 10,000 and 10,500 new homes this year, in line with prior guidance. Full-year operating margin is expected to be in line with the prior year.

The shares were broadly flat following the announcement.

Our view

After a shaky 2023, Persimmon’s first-quarter update has shown some early signs of improvement. Sales rates edged slightly higher in the period alongside a growing order book, indicating that buyers’ confidence is beginning to improve.

While the near-term outlook for Persimmon and the housing market remains uncertain, the significant pent-up demand for homes in the UK remains unchanged. We’re not calling for a step-change improvement in fortunes for 2024. But easing mortgage rates, lower build-cost inflation, real wage growth and strong responses to marketing efforts are all early positive signs.

In a bid to preserve cash, Persimmon continues to hold back on investing in new land - something we expect to continue across the year. The group's able to do this due to its extensive land bank, which is amongst the biggest compared to peers. Having this large pipeline means there’s less pressure to go out and buy new plots at a time when prices are yet to fully reflect the uncertain housing market. When the market does pick back up, Persimmon has the land to hike volumes quickly and benefit.

Market forecasts expect revenue to remain broadly flat in 2024. That's not wonderful, but housebuilders are cyclical businesses that go through periods of ups and downs. And as Persimmon's houses are typically cheaper than the UK average, its selling prices may prove slightly more resilient than some competitors.

Last we heard, Persimmon’s balance sheet was in decent shape, with margins in the middle of its peer group. There are also the in-house materials businesses, which we see as a key differentiator and should help operating margins head back in the right direction. This vertical integration gives quick and cheaper access to key materials. For example, 54% of the bricks used are sourced in-house, giving a £1,800 saving per plot. That's a key advantage when inflation's running hot.

We also see reasons to remain positive on the long-term fundamentals of the UK housing market. The nation faces a housing shortage, all major political parties are committed to further housebuilding, and mortgage markets look to be improving to some degree.

Given the pressures, it's not surprising to see the valuation below its longer-term average. But broadly speaking, Persimmon's trading at a premium to most of its peers, which we see as a reflection of underlying strengths. The group looks to be in as robust a position as it could be for now, but at the current valuation, we prefer other names in the sector.

Environmental, social and governance (ESG) risk

Most housebuilders are relatively low risk in terms of ESG, particularly for those in Europe. However, there are some environmental risks to consider, from direct emissions to the impact of their buildings on the local ecology. The quality and safety of their buildings is also a key risk.

According to Sustainalytics, Persimmon’s management of ESG risk is strong. The group collects and discloses scope 1, 2, and 3 emissions and has strong emission reduction plans in place. It has also committed to its homes being net zero carbon in use by 2030. However, there’s currently limited disclosure on what percentage of materials are recycled. Disclosures around product and service safety is also lacking.

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